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Why Inflation Is Good For You

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100 Trillion DollarsInflation is the invisible erosion of our money’s purchasing power. It doesn’t sound like it’s good for you, right? Economists have said for quite some time now that inflation is good for you, it’s good for the economy, and part of a healthy market. Yet when things are more expensive, I feel like it’s a bad thing and you probably do to.

This post won’t be about the esoteric economic benefits of inflation, you can read that in a textbook. This will be an explanation of the real and tangible effects of inflation on you, regular Joe or Jane Doe and your family.

Debt Is Cheaper

When the purchasing power of the dollar decreases with inflation, so does the weight of your debt. The total dollar amount of your debt won’t change, minus your payments, but the weight of that debt on your household budget will diminish over time. This is why many people say that a home mortgage is a hedge against inflation.

If you opened a 30-year fixed $100,000 home mortgage at 5% ten years ago, ten years of payments will have lowered the balance to $81,342.28. We can use BLS data and their inflation calculator to calculate the purchasing power of $81,342.28. $81,342.28 in 2000 has the same purchasing power as $102,981.12 today (2010). If you had a $50,000 salary in 2000 and were given raises pegged to inflation, you’d be making $63,301.10 today. Your mortgage payment wouldn’t change, that’s set for the life of the mortgage, but everything else has inflated around it.

So why do people advocate paying down debt? It’s because of the interest payments. Inflation has a powerful impact when you’re talking about mortgage rates for two reasons – the interest rate is fixed and the mortgage interest rate is low relative to the inflation rate. When you start talking about double digit credit card interest rate, inflation looks tiny next to such large numbers.

Companies Can Increase Prices

This is a bit of a chicken & egg type of reason but it’s still a valid one. When there is an economic recovery, companies will see an increase in demand and can start raising prices, prices they likely dropped or held low because of decreased demand. Consumers may not like seeing higher prices but it’s a sign that a company is growing stronger and it gives them the confidence to hire more workers.

More workers means increased productivity and fewer people on unemployment. It means there are more people with more money to buy goods and the cycle feeds into itself. It also means that salaries will likely go up as demand increases. A higher salary is good, right? :)

So while prices might be going up, which seems like a bad thing, it’s going up for a good reason. It’s like buying new clothes because you’ve lost weight.

Forces People to Spend

This sad story about North Korea shows how changes in the value of currency can force people do seemingly erratic things. When North Korea devalued it’s currency (and capped conversions), people started paying “exorbitant” prices for some products.

Why is forcing investment and spending good for you? It strengthens the economy as a whole even if it, seemingly, weakens you individually. If you have a lot of savings and you are surrounded by people who are unemployed, are you better off? You might be individually but your neighborhood falls into disrepair as your neighbors can’t afford to maintain their homes.

In the end, inflation is a good thing even if you aren’t an economist. We can all agree that when our society grows and prospers, it’s more likely that we will individually prosper even if it’s not as obvious when we are forced to pay more for the same products.

Can you think of any other good reasons why we should embrace and encourage some inflation?

(Photo: vegaseddie)

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19 Responses to “Why Inflation Is Good For You”

  1. SAFTM says:

    Very good point about inflation and fixed payments like mortgages. There are gives and takes though – even when focusing on tangible only. If you isolate hosing payment for example deflation may be good for some – i.e. the rental market deflates and costs go down. But then those folks may also see deflation of salary. I guess my point is for isolated items, inflation is not necessarily good for everyone – there are people on both sides of the equasion. But I do agree that controlled inflation is not something to be feared as much as it seems to be – at least when it comes to tangible effects.

  2. It is a bit of a stretch to make a blanket statement that inflation is good. In theory a low but steady amount of inflation is good for deficit-spending governments and will keep asset prices and consumer prices rising at a rate the electorate can tolerate. But don’t forget the economic environment of the 1970s and early 80′s…. stagflation is the worst of all possible worlds. Governments have proven time and time again they cannot fine tune the economy or stem the tide of economic forces. High interest rates, high inflation and no growth is much worse than our current environment of low interest rates, low inflation, and no growth. Inflation can create the illusion of wealth but doesn’t necessarily create real wealth.

  3. Consumers may not like seeing higher prices but it’s a sign that a company is growing stronger and it gives them the confidence to hire more workers.

    Is it a sign that a company is growing stronger, or that it needs to cover the costs of its newly inflated labor and capital?

    The blanket statement “inflation is a good thing” is a bad thing. Inflation is atrocious if your business requires a return on lent money. Yes, inflation is fantastic if you’re borrowing, and the more, the better. But inflation eats away at the purchasing power of everyone who has cash holdings. Inflation is the ultimate regressive tax – the fewer non-cash assets you have, the more your nest egg dwindles. While a point or two of inflation (as opposed to deflation) is necessary to keep the banking industry in existence, there comes a point where inflation cripples the economy almost as badly as central planning could.

  4. DIY Investor says:

    Inflation is a change in the value of the medium of exchange. It creates winners and losers to the extent it is different from expectations. In the 1970s “whipping inflation” was the number 1 problem facing the economy. But now that we’ve had decades of low inflation people are ready to run the printing presses. It will only replace one problem with another problem. Sadly, the Federal Reserve and former chairman of the Econ. department at Princeton don’t get this. But probably we’ll get a whiff of deflation first. Buckle up…it’s probably going to be an interesting 20 years ahead!

  5. hannibalsfather says:

    Inflation is a great thing, products increasing in price is relative but if our dollar value is gaining more power on the market than why aren’t our salaries/pay dynamic to fit the increase also?

  6. Jin6655321 says:

    Outsourcing.

    I found an old Sears catalog from 1979 and I was shocked at how similar the prices were to their 2010 counterpart. Pants for $12.99, button downs for $14.99, belts for $10.00, purses for $27.99, etc. Any bargain shopper worth their salt can find the same items for the same price today. Granted back then they were probably made in the US by people making a living wage and made of better material (real leather vs. fake).

  7. Shirley says:

    Inflation is not a good thing for us. We are retired and have no salaries to increase and it’s a sure thing that Social Security, which constitutes half of our income, is not going to increase. We have no outstanding debt to decrease. Our IRA portfolio is made up (at this point) of medium risk investments as this is not the time in our lives to be throwing caution to the wind. Our backup is in cash savings and CDs, so the dollar value of those is shrinking with inflation and rising prices.

    So while inflation may be deemed somewhat of a good thing for the economy, for us personally, it is not.

  8. billsnider says:

    I almost fell off my chair when I read your headline. I hope people don’t fall for your logic.

    I remember the 70′s and 80′s very well. In 1970 I was paying $0.31 for gasoline. That changed in a hurry. My home taxes were going up 10% and more. The mantra was spend, spend, spend. You were considered to be an idiot if you put money in the bank.

    On the job, we found it very hard to plan for the future. Costs were jumping up at a rapid pace. We started to take a very limited view of our business. We were afraid to invest in new plants and products. This really came back to haunt us later on.

    Banks were failing. If you are not old enough, research S&L’s. These were banks that invested in mortgages. They went under at an alarming rate. Home loan interest rates ballooned to 18-20%. So your arguement that you paid less on a relative scale does not hold water. Youy have a very leaky bucket.

    Good luck to one and all who believe in inflation.

    Bill Snider

    • Money is nothing more than a barter medium. Once that transaction has occurred, anything that causes the value of that money to change, changes the future spending power of what you have. Inflation means that you get less than you received. You lose money. There are no two ways around this. His entire argument is based around justification of “deficit spending” and being “in debt” as being good thing. Those practices are destroying not only this country, but every developed nation that chooses to embrace them. Your $100,000 salary today seems like a lot of money if you haven’t adjusted your mindset with inflation – that means you’d be happy making $100,000 per year if you were born in 1971 when the U.S. went off of the Gold Standard and inflation went through the roof. Too bad the purchasing power of a $100,000 annual salaray now is the same as a $17,000 annual salary was then. That means that if you made $25,000 per year in 1971, you’d have to make nearly $150,000 per year just to have the same standard of living today. People need to wake up and stop falling for pseudo-intellectuals like the origniator of this post.

  9. Inflation is just a way the government steals from everyone who owns a dollar.

    A small amount of inflation is normal and healthy. Higher inflation is a sympton the government is printing money to cover deficits.

  10. Inflation is good for debtors and asset owners, bad for wage earners (the increases never seem to keep pace with inflation) and bond/mortgage holders. A little inflation is tolerable, a lot of inflation can lead to economic collapse….. just look at the Weimar Republic or some of the third world economies like Zimbabwe or even the US in the late 1970s and early 1980s.

  11. inflated says:

    Inflation and job growth are bad for unskilled workers if they already have a job. All the inflation in the world won’t lift their wages – only an increase in the minimum wage will do that – and since job growth increases household formation and leads to lower rental vacancy rates, they will face higher rents.

  12. waggoner41 says:

    The problem with inflation vs income is that the averga middle class wage is not pegged to the rate of inflation or the CPI leaving them with declining purchasing power over time.

    • Sam says:

      That is not a problem, it’s by design. It’s an extremely effective way to transfer wealth. I don’t see why everyone is being so negative in the comments,

  13. Sam says:

    Inflation is a useful way to keep down taxes. Because people throw a fit when they are taxed appropriately we must use inflation to take value from them. It’s pure genius because the majority of citizens don’t know it’s going on. Fortunately they have absolutely no understanding of the banking system. They don’t realize that recessions are created by increasing and decreasing the money supply. They are slowly being robbed blind, and seem to be happy victims. So yes inflation is very good!

    • Matt says:

      @Sam,

      How is the ignorance of the ‘majority of citizens’ and its use by the government to ‘take value from them’ a good thing?

      My intent is not to blindly challenge your assertion but my intuition leads me to consider that you are joking, or at least speaking tongue-in-cheek.

      Is your position that the government needs more money and that, the easiest way to get it is to play on the ignorance of the consumer, or citizen?

      Please explain. :)

  14. jdl says:

    For a retired person however, or someone “saving” for retirement however that is accomplished, inflation will generally erode your retirement.

    I think these arguments are pure whitewash. Inflation is not good except for some people on a certain side of things.

    Paper is paper. Whomever is holding the real value of something is it, and whomever is stuck in paper regardless of how that is represented simply is not.


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